How you invest depends on how much you have

Wealth grows from humble beginnings, just as the giant oak tree begins as an acorn. And while the wealthy generally do pay less as their money grows — they benefit from economies of scale — this isn’t always the case

The rich are different than you and I, runs the old saying. The corollary is that the investments available to them may also be different. Hedge funds and private equity are two examples of financial offerings that may not be available to the masses. Also, many investment counsellors and discretionary managers often have high minimum investment requirements: $500,000, $1-million and up.

At the other extreme are mass-market investments such as bank GICs (guaranteed investment certificates), savings bonds and mutual funds, where the minimum purchase may be $100 or $500, if that.[np-related]

But it’s from these humble beginnings that wealth grows, just as the giant oak tree begins as an acorn. And while the wealthy generally do pay less as their money grows — they benefit from economies of scale — this isn’t always the case. Hedge funds are arguably costlier to own than mutual funds, because the fee is typically 2% of assets plus a 20% performance fee.

Meanwhile, GICs and savings bonds don’t really have fees at all, or at least a transparent one you can discern. A typical mutual fund in Canada has a management expense ratio (MER) of about 2.5%. Someone with $1-million invested in such a fund would be paying a lot: It works out to $25,000 a year.

On the other hand, for small portfolios up to $50,000, you could argue the same 2.5% fee is the best deal in town: $1,250 a year for a broadly diversified portfolio of securities bought and sold by professional money managers.

In our 1998 book, The Wealthy Boomer: Life After Mutual Funds, my co-authors and I settled on a $200,000 figure as the point where investors on the cusp of wealth might seek to “graduate” to various forms of managed money. But there are also intermediate products, such as wrap programs or managed accounts, sold with minimums that may range from $25,000 to $150,000 or more. Their fees usually won’t be any cheaper than mutual funds bought à la carte by smaller investors.

Cost-conscious investors can use index mutual funds or exchange-traded funds at any level of wealth. The same goes for customers of traditional stock brokerages who like to invest directly in individual stocks and bonds. Buy-and-hold investors who trade infrequently and thereby minimize commissions and taxable events may find the traditional brokerage model to be cost-effective, with good advice to boot.

Frequent traders may find full-service brokerages expensive, so if they’re self-directed they may migrate to a discount broker, buying and selling their own securities and funds. But discount brokerages and indexing do not mean forgoing good advice. You merely contract for financial-planning advice with a fee-only advisor, getting the best of both worlds.